terça-feira, março 02, 2010

We had the dot.com bubble and then the real estate bubble, and now we are looking at the student loan bubble. All over the country, tuition is going up, and students are turning to public and private loans in order to finance the cost of their education. Not only does this mean that many students will graduate with huge debts that will take them years to pay off, but the student demand for credit is resulting in a huge gold rush for banks and other private corporations.

One of the main reasons why the United States has to keep coming up with new bubbles is that there are trillions of dollars of investment money sloshing around the globe desperately looking for a "safe" place to land. A few years, ago it looked like real estate was the stable area for investment because people need homes and credit was freely available. Moreover, the constant inflation of home prices seemed to guarantee a fixed market for financial speculation; however, once people started to foreclose on their mortgages at record rates, the whole pyramid started to collapse.

To prevent a total global financial meltdown, the Obama administration poured trillions of dollars into the banks, and they guaranteed most of the financial institutions' loans with taxpayers' funds. The banks in turn started to buy U.S. treasury bonds and to horde their money because it was safer and easier to earn interest off the money they got from the government than to lend it to small businesses or new homeowners. However, we are now seeing the return to our favorite financial instruments, credit default swaps, collatorized debt obligations, and various exotic securities.

The trillions of dollars of global debt and credit needs to find a bubble so investors can work their magic and turn hard-earned debt into a new source of profit and speculation, and here is where student loans come in. Looking at the American market for college loans, bankers and investors have found a large pool of debt that can be easily increased, leveraged, and sliced and diced. While the Obama administration says that it wants to start taking over most of these loans, it has also said that it wants to regulate derivatives, but it looks like neither of these two things will happen.

We must remember that what has turned the United States into a debtor nation is that real wages for the vast majority of Americans has stagnated for thirty years, while the cost of health care, education, housing, and energy have continued to go up. Besides the top 15% of the American earners, most Americans have been forced to take on debt to pay for the essential things that no one can do without. This constant need for loans and credit has created the debt pool for global capital to invest public and private funds. So don't be surprised if a country like Ireland or Italy goes into a depression if American college students stop paying back their loans.

The global debt and credit market has functioned to hide the growing economic inequality in the United States. Simply put, because Americans have been able to borrow so much money to pay for their homes, health care, and education, most people have not noticed that their jobs do not pay enough to support their basic necessities. Moreover, due to the constant availability of credit, health care corporations, real estate sellers, and universities have been able to charge whatever they want, and they have little incentive to cut costs or reign in executive pay.

From this perspective, the free market is really a giant Ponzi scheme where companies hold down workers wages so that the employees are forced to live on debt, and then this debt is bought and sold on a global market. In this structure, the only way to make money is to be an executive or to be an investor who knows when to leave or enter the market at the right time.

It would be great if the tea partiers understood that while they are protesting against the government and yelling "take your hands of my social security," the real cause for their lost income and homes is the fact that their jobs do not pay enough, and the health care, housing, energy, and education industries have not been regulated. Furthermore, it is because workers have not been unionized, and the laws have been stacked against organized labor, that workers have not been able to increase their income. Without a collective, unionized voice, there is no way that employees can fight for a fair share of their company's or institution's profits.

The basic solution to all of these problems is to unionize all employees, regulate the cost of health care, education, and housing, and outlaw destructive financial instruments. In other words, we should become a lot like France, Germany, and Sweden. Of course, most Americans will respond by saying that we do not want to pay 40% of our income into taxes, but without higher taxes, we all will be paying more for everything else, while we go deeper and deeper into debt. Why didn't they teach us this in college?